If You’re Planning On Buying A House, Here’s How To Save For It
The American Dream of owning your own home: It’s a worthwhile goal, to be sure, but one that can come with pitfalls and unforeseen difficulties that could make you rethink your “home, sweet home” decision.
Armed with some knowledge and sound decision-making, however, you can make home ownership more about jubilation than tribulation. Here are a few tips that can help you move along the path to home ownership.
Start With Saving
Houses – of all kinds – usually don’t come cheap. You’ll want to start saving money as soon as possible so that you have enough cash on hand to make a down payment once you’ve decided on a house.
A basic savings account is a good place to start, but the interest rates on these types of accounts can be minimal. Some high-yield savings accounts offer significantly better interest, which means your money could grow at a better rate. Bear in mind, however, that you may be required to provide a minimum initial deposit, maintain a certain balance, or pay regular, ongoing fees.
It pays to remember that the money you’re saving for your down payment needs to be easily accessible. You’ll want to be able to get to your saved money quickly if you’re making an offer on a home; for that reason, long-term investments such as a five-year certificate of deposit would not be the best choice for your savings.
Determining a realistic monthly budget — and maintaining it — can help you reach your saving goals. Begin by tracking your monthly expenses, which will help you determine where your money is going and how you can cut unnecessary spending. A trimmed-down budget will allow you to put more funds aside for your down payment, but remember that the down payment is only one part of financially securing a house. Consider any additional costs you may incur when purchasing a house, including closing costs, appraisal fees, and legal fees.
Determine A Down Payment Goal
When it comes to a down payment for a house, the rule of thumb is to allot a maximum of 25% of your monthly take-home pay on your mortgage payment. Once you’ve determined your monthly payment amount, you can then use a mortgage calculator to ascertain how much home you can realistically afford after factoring in the down payment and the home loan interest rate.
For example, let’s say 25% of your household’s take-home pay is approximately $1,200, and a 30-year fixed-rate loan comes with an interest rate of 2.75%. With those numbers in mind, you could plan on buying a home worth $370,000 if you’re able to save up and make a down payment of 20% ($74,000).
Most lenders expect a down payment of at least 5% on a conventional mortgage and as little as 3.5% on an FHA loan. Some first-time buyers can put down as little as 3% with a conventional 97 loan, while some veterans and rural Americans can take out a loan without providing any down payment. Keep in mind, however, that if you put down less than 20% and you’re taking out a conventional mortgage, the lender might consider the loan to be a risk and require you to pay private mortgage insurance (PMI) monthly.
You Can Save For A House Even While You’re Renting
When you’re a tenant, the rent is due every month, and there goes a chunk of money you could be putting towards your down payment fund. On average, financial experts recommend that individuals spend no more than 30% of their income on rent. So how can you accumulate enough funds for a down payment when you’re always setting aside money to pay the rent?
First, take a close look at your daily and monthly expenses, and eliminate any expenditures you can do without. (All those streaming services require a steady stream of cash.). You can also look to lower your rental costs by bringing in a roommate to share expenses.
You might want to consider a debt consolidation loan that will replace all of your debts with a single loan, usually at a lower interest rate. You’ll be able to pay off your debts sooner, which will free up more money to be added to your down payment fund.
You might also be able to save money by switching your car insurance. Comparing and contrasting quotes from multiple insurers allows you to see which company is offering what, and at what price. The more you know, the better position you’ll be in to save money – sometimes hundreds of dollars – on your car insurance. And that can help put your down payment savings plan into overdrive.